5 Ways to Prepare Before Applying for a Mortgage
Buying a home is likely the most significant financial investment that you will ever make and requires serious consideration. If you are ready to buy a house, condo, or piece of land, you will need to find a mortgage lender to help you make your dreams come true.
To minimize disappointment, you must do your homework before making your mortgage application. You should have a good feeling about your approval before you apply. This means you will have to look closely at your finances, credit report, and lender’s general qualifications for a mortgage.
If you are a first-time home buyer, you may not understand much about the process or how bank loans help a nations economy, but you should know the basics, including interest rates. Let's take a closer look at a few ways to prepare before applying for a mortgage loan.
Review Your Income
You may believe that you make enough money to afford a home, but you will need to review your finances before you make an application. Your actual income includes the amount of your paycheck minus all of your expenses. Take a look at your budget to help you find out how much money you have to spend on a mortgage payment. To prevent you from overspending on your mortgage, a good rule of thumb is to stick to the 30% rule. Your mortgage payment should not exceed 30% of your total income.
Check Your Credit
Your viability to secure a mortgage loan is highly dependent on the quality of your credit score. You can get a free copy of your credit report from the major reporting agencies online. Ensure everything in your report is correct and all entries are accurate. You may want to take this opportunity to clear out any old debts to boost your score. The lower your credit score, the higher your interest rate will be.
Find a Lender
For a conventional mortgage loan through your bank, you must have a minimum credit score of 620. If you have a low score, you may need to consider other types of lenders. You may qualify for an FHA loan that only requires a 500 score, or you could get funding through the Veterans Affairs office if you are a current or former military member.
Save for a Down Payment
In some cases, you may only need to provide 5% of the purchase price of a home for your down payment. However, those rates are generally reserved for those that are first-time buyers or have excellent credit rates. On average, you should prepare to save 15% to 20% for your down payment. This may take some time, so you must set aside money for your down payment early.
Gather Your Documentation
Once you have made an appointment with a potential lender, you should gather all the required documentation. Most lenders will require:
- Two forms of government photo I.D.
- Tax forms for the past two years
- Copy of current mortgage
- Proof of Income
- Bank statements for the past three months
If you are ready to take the next step towards buying your dream home, follow these steps to help you prepare for the loan application process.